Amid the Din over Exec Pay, Companies Hold the Line

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After all the hoopla over executive compensation in the past couple years, how much has changed? Has the increased disclosure in proxy statements that the Securities and Exchange Commission mandated last year influenced corporate strategies?

Judging by interviews with compensation experts, there has not been a dramatic shift, in response to either the SEC rules or unrest within the investor community and the public at large about executive-compensation levels. For the most part, emerging trends have more to do with providing the now-required detail in the Compensation Discussion and Analysis section of proxy statements than with how much executives are paid.

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“In the pay levels themselves, there wasn’t a lot of big news. It was really about the focus on the CD&A,” says Jannice Koors, managing director at Pearl Meyer & Partners.

In 2007, the year the new rules took effect, many companies did not comply, with the SEC having stated that it would not pursue enforcement actions right away. But the commission signaled its intention to get tough last October, when it published a review of the first year of its revised compensation rules and mailed 350 letters to companies it deemed to have made insufficient disclosure in their 2007 proxies.

The tactic appears to have been fairly successful. A majority of companies are now in compliance, according to Mark Borges, a principal with compensation consulting firm Compensia.

A significant number of companies have opened up about the way they set incentive-plan performance targets, notes Alexander Cwirko-Godycki, research manager at Equilar Inc. His analysis of 2008 CD&A statements from Fortune 100 companies shows that 66 percent disclosed incentive-plan performance targets, up from 56 percent in 2007.

“We’ve gone from a situation where a lot of companies were on the fence to one where a clear majority of companies are disclosing these targets,” he says. “It’s a massive improvement, and we expect it to continue.”

Cwirko-Godycki notes that CEO and CFO total pay, including bonuses, incentive awards, and stock-option awards, was actually up 1.3 percent and 5.4 percent, respectively — despite the worsening economy hindering efforts to meet performance incentives. Long-term compensation plans are still paying well, but short-term ones have taken a hit this year.

Executive performance bonuses in the housing and financial services took the hardest hit, but others are likely to follow, according to Borges.

“The effects always trail what’s happening in the economy,” says Borges. “I would expect, based on what we’ve experienced this year, that we’re going to see a lot more programs where total compensation is flat or down.”

There was a particular increase in disclosure regarding severance packages. Under the new SEC regulations, companies must disclose how they would pay executives and their families upon an executive’s death or if the company was sold, closed, or taken over. And that requirement may have been the trigger for changes to the plans themselves.

“We’ve seen more changes to severance and change-of-control agreements and more amendments to the plans,” says Cwirko-Godycki. “Although the changes weren’t dramatic, there was a lot of tweaking to the plans in situations where companies realized that they had some provisions that no one else had. But most didn’t make big cuts.”

As for changes to compensation itself, maybe the most significant one involves perquisites. Borges says a large number of companies have scaled back on perks or in some cases even eliminated them.

And, while the new SEC regulations are all about increased disclosure, in the case of perks many companies this year actually reported less detail, according to Borges.

Before 2007, companies were required to disclose total perquisite expenditures of $50,000 or more per executive. The SEC last year reduced that threshold to $10,000, which increased companies’ administrative burden of tracking the expenses. The commission did not, however, provide guidance as to whether expenses must be itemized (corporate jets, club memberships, personal financial planners, etc.).

In the first year of the new rules, some companies cautiously included such detail, while others merely disclosed the total perk allowance for executives, which had been common prior practice. This year, though, after the SEC did not react to companies that omitted the itemization, the number of companies opting for the non-detailed disclosure roughly doubled among a group of 50 Fortune 500 companies that Borges has been studying.

Meanwhile, it’s not just the new SEC requirements that are playing on companies’ minds. Perhaps just as likely to steer change is widespread scrutiny from public officials, investors, and the media.

“With the scrutiny of CD&A by the media and institutional investors, and a general outcry around ‘what are shareholders paying for,’ compensation committees are revisiting the basics with a little more energy,” says Myrna Hellerman, senior vice president of Sibson Consulting. “They’re asking: what is it that we really believe about paying our people? Who are we going to compare ourselves against? Where are we going to position ourselves in the market? How are we going to use equity? How much is enough? And how much wealth should executives accumulate?”

For example, Watson Wyatt Worldwide reported on Wednesday that in an analysis of 75 large public companies, 87 percent now have stock ownership guidelines and requirements for executives, up from 75 percent in 2007.

Additionally, 38 percent have a claw-back policy that enables companies to recoup investment compensation if the financial measures underlying the incentive plans are restated. That compares with 23 percent a year ago.